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Craft Beer

Building a
Better Black Sheep 


An independent outsider's analysis of the Black Sheep Brewery’s 2022 Report & Accounts...

I begin with Andy Slee’s (“Andy”) Chairman’s Statement.

In paragraph 2 Andy laments that “breweries received minimal government support during Covid”, which suggests he has overlooked the generous furlough largesse of Masham’s very own MP and former Chancellor, Rishi Sunak.
In paragraph 5 he states, “In a challenging environment it’s easy to play it safe but that has not been the case at Black Sheep.” That seems an opaque statement but somehow rings true, because under Andy’s leadership, Black Sheep has once again recorded a million pounds plus loss on reduced revenues and net assets, while piling up £7.7 million of debt to the point where our bankers and any would-be equity investors must have serious concerns about our Company’s solvency, all of which is reflected in the destruction of shareholders’ capital value, as the indicative share price, now at £1.15, has continued to fall.

But it gets worse. In paragraph 6 our Chairman makes the astonishing assertion that we “are confident that we can alter the perception of younger beer drinkers through innovative marketing”! Any sensible chairman would recognise where the UK beer market is heading, that is away from cask beer and generally towards lower alcohol content beverages, and position Black Sheep’s offering accordingly, but our very own Canute is determined to prove the market wrong, and our falling sales is only proof positive of his misjudgement.

More generally, Andy speaks of the “remarkable resilience and hard work of the Black Sheep management team”, of “excellent progress in our local direct channel”, of the receipt of “plaudits for our innovative “Drink Cask Beer” campaign”, and of punching “well above our weight”. All worthy but I’m afraid empty words not backed up by any numbers on increasing volumes, or vision for future profitability.

I do not know, but my guess, given the lack of any current/future guidance on trading from either Andy or Charlene Lyons (“Charlene”), either in their Reports or at the recent AGM, together with the current UK Cost of Living Crisis, is that Black Sheep will sadly record yet another significant loss in the current year to end March 2023.

Turning to Charlene’s Report, and against Christmas 2021 being in her words “a huge disappointment” and “increasing input prices”, “inflation” and the “war in Ukraine” impacting “consumer confidence”, she states that the “team at Black Sheep are working through these challenges to grow a better, stronger, and more relevant business with a broader range of products which will appeal to consumers across wider age ranges.” Words, words, and more words!
After twelve years of Rob and Jo Theakston’s (“Rob” and “Jo”) in my view very poor contribution, six years of Andy’s muddled lack of leadership and nearly three years of Charlene’s chief executiveship, jam tomorrow statements like that should cut no ice with shareholders.

Under “Result for the financial year”, Charlene explains that off-trade sales fell by 29.67% but gives us no yardstick to compare that figure with. Did UK off-trade sales generally fall by almost 30% during that period, or did Black Sheep materially under-perform? I will find out and report back.

Then Charlene states that “Turnover increased to £14,259,471” derived from a welcome increase in on trade sales to £5,730,152 plus reduced off trade sales of £6,713,841 and retail sales of £2,503,892. However, those three amounts add up to £14,947,885, a difference of £688,414, or 4.8% more than the Accounts stated revenues number of £14,259,471.

When I questioned this, Charlene explained the difference is accounted for by “intercompany sales”, but that because they don’t present “a brewery only income statement”, they “cannot reconcile the on and off trade” sales split. Watching the AGM slide presentation, I thought I saw a slide showing brewery only income, but I await a copy of those slides to confirm that. Since brewing is anyway Black Sheep’s main business you might think it logical to present “a brewery only income statement”, and since we hear so little from our Board, I think they might take the trouble either to get their numbers right or to explain apparent differences properly in the Accounts. I hope our new auditors, Azets Audit Services, will insist on less opaque accounting next year.

Charlene goes on to airily refer to being “on the front foot in the last two years”, “showing a degree of leadership”, growing “our business in our Yorkshire heartland”, “achieving impressive results”, that “Our brewing team is truly innovative”, but for the second year running we lost more than a million pounds (that’s excluding the one-off insurance receipt of £2,268,605 during the year to end March 2021). That doesn’t sound like being “on the front foot” to me!

The nub of the problem is revealed on page 5 under the Strategic Report, where in paragraph 5 it is disclosed that Brewery turnover was almost exactly static at £11.8 million between 2021, when Covid was really raging, and 2022 (actually a small reduction of £35,139), when most hospitality businesses saw some improvements in sales.

Next, our ecommerce business is stated to have enjoyed “another good year” with sales of £0.37 million, a 50.6% reduction on 2021’s £0.75 million. If a reduction in revenues of 50.6% is regarded by our management as a good year, I shudder to think what they would categorise as a bad year!

In my last letter of 21st September, I commented on Timothy Taylor’s so much more positive results, and I also note that Rob and Jo’s Theakston cousins, who operate the re-acquired, Masham-based T. & R. Theakston brewer, trade profitably on a turnover of circa £6 million, which only highlights how poorly the way our own Black Sheep brewery has been and continues to be run.

Turning to the Strategic Report (“SR”) signed off by Black Sheep’s Secretary, Amy Clarkson (“Amy”), she states “we now hope to experience a prolonged period of positive trading.” Based on management’s persistent platitudes of previous years, I’m afraid I have no faith at all in this yet another “jam tomorrow” promise.

Page 6 highlights the extreme precariousness of Black Sheep’s financial position. Not only is our Company reliant for its working capital facility on invoice discounting, traditionally a sign of financial weakness and particularly so for long-established companies, but under “Principal risks and uncertainties” the SR warns of increases in the prices of malt, energy, glass bottles and labour, not to mention CO2, which they forgot to mention.

Then under “Financial risk management objectives and policies”, a paragraph, which must have been written during August, the SR presciently warns of the risk of changes in interest rates and credit and liquidity risks. I’ll say!

In the “Report under s172 of the Companies Act 2006”, the directors state that they consider they have acted “fairly as between members of the Company.” With the sad financial state that Black Sheep is now in, I cannot agree.

Finally in her SR, Amy refers to shareholder communication. As stated above, I recently referred Andy’s persistent failure to provide shareholder updates when shares in Black Sheep were being traded on the Asset Match platform to the Financial Conduct Authority (“FCA”). The FCA have informed me that they have in turn passed my complaints to their Market Abuse Team and they recommended I share my concerns with the management of Asset Match Limited, and this I have now formally done.

Notably, the “Investors” section of Black Sheep’s web-site has, so far, once again failed to supply shareholders with copies of the slides provided to attendees at the recent AGM, and as ever behind the times, continues to show the indicative share price as £1.20, whereas on the Asset Match platform, one thousand shares are offered for sale at £1.15.

On page 8 under “Results and dividends”, it states “The directors do not recommend payment of a further dividend”! Further dividend? The last payment of 9 pence per share was made in respect of the year to 31st March 2012, which was unchanged on the payment for the previous year. So, referring to a “further dividend”, when few shareholders will remember payment of the last one, is either lazy editing of the Report & Accounts or rubbing our noses in it.

On page 8 under “Directors” there is no mention of the number of board meetings held during the year, the number of each such meeting attended by each of the then directors, the name of the Senior Independent Director, of which there is clearly none, or the composition of the Audit, Finance, Risk and/or Nominations Committees. You may wonder why not.

Again, on page 8 under “Directors’ interests”, the shareholdings of Andy, Rob, and Jo are disclosed, but there is no mention, as there should have been, of the five per cent plus shareholdings held by Rulegale Nominees (331,637 – 13.64%), I believe on behalf of the Campaign for Real Ale (“CAMRA”), or of Mrs. Dorothy June Horrocks (177,500 – 7.3%).

All of the above are just further demonstration of Andy’s poor communication skills and simple lack of understanding as to how a competent chairman should run a company.

Perhaps understandably, given my consistently accurate criticism of his failure as chairman, Andy recently e-mailed me saying “With AGM successfully concluded, I have today reemphasised to the Board that every working hour needs to be spent on either growing sales or raising the much-needed capital into Black Sheep. To that end, contact (calls, texts, emails etc) from yourself to any member of the Black Sheep Board will not be responded to”!

Andy’s retreating into in his bunker of non-communication will get Black Sheep precisely nowhere and note his words - “either growing sales or raising the much-needed capital”, yet again demonstrating his complete misconception of the correct direction of travel. Black Sheep desperately needs to both grow sales and raise capital, but the implicit suggestion in his wording is that he already knows raising new equity capital while he, Rob and Jo remain at the helm is an impossible task.

Notably, under “Share based payments” on page 36, there are no longer any share options outstanding under either of the Company’s SAYE and EMI schemes.

Given our CEO, Charlene, owns not a single share in Black Sheep, shareholders should question (a) whether her interests are fully aligned with ours, and (b) the fact that after almost three years of hard work, she has still not been rewarded with any share options, may indicate the Board believes Black Sheep’s shares remain considerably over-valued and want to wait for a more propitious time i.e. lower share price, before issuing Charlene and John Hunt (“John”) with incentivising share options!

On page 9 under “Statement of corporate governance”, the second sentence begins “The non- executive directors bring etc.” Since for the entire financial year to 31st March 2022 there was only one non-executive director – Andy, one wonders whether either the Board or our new auditor, Azets Audit Services, bothered to proof-read the 2022 Report and Accounts before they were sent out! I hope the 14.1% reduction in the cost of audit services referred to on page 29 under “Auditor’s remuneration” will in no way reduce the quality of oversight provided.

Again, on page 9, under “Policy on the payment of creditors”, Amy discloses that the average number of trade creditor days increased during the latest year by 23.8% from 42 to 52. While this may look like good housekeeping, given Black Sheep’s precarious financial position, I imagine it is more likely to be giving our suppliers cause for concern.

And on page 9 under “Sustainability report”, there are lots of pious words about long-term carbon neutral and beyond targets, but no indication as to how the Board have evaluated their potential costs or how they will be funded. For example, electricity consumption reportedly fell by 30.09% during the year to 31st March 2022, while gas consumption only increased by 22.07%, which sounds good, but without any indication of the prices paid per kilowatt hour for either fuel source, it is impossible to judge whether this was a positive achievement or not. Why, oh why is our Board so secretive?

I have already referred to, and so will not repeat my comments on the dire state of the Consolidated Income Statement and Consolidated Statement of Financial Position in my letter of 21st September, but I particularly draw shareholders attention to the “Profit and loss reserves figure” on page 17 of just £736,198, down by 57.52% from the previous year’s figure of £1,733,207. If I’m right about this current year being loss-making, I fear our reserves may be wiped out entirely, with all that implicates for our Company’s banking covenants.

With Black Sheep almost certainly heading for another loss in the current year and the near impossibility of raising new equity finance while Andy, Rob, and Jo remain on the Board, shareholders should be very worried indeed, as I am.

On page 27, the total number of persons employed by Black Sheep during the year to 31st March 2022 is stated to have remained almost constant at 125, while aggregate remuneration rose by 9.1%, but shareholders may be alarmed to note that in a heavily loss-making year, Directors remuneration rose by 56.3%, and that was before John joined the Board.

I had already in my letter of 21st September, highlighted the 85.6% increase in interest charges paid during the year, but shareholders should note that at the 31st March 2022 year-end, UK interest rates had hardly begun their recent meteoric rise.

Ominously on page 34 under Notes to the Financial Statements section 18 “Borrowings”, it states “The bank loans ........ are repayable in instalments over a period of up to 10 years ....... and incur variable interest charges at a market rate of interest secured at the inception of the loan.” That does not sound to me as though Black Sheep’s management have been able to fix our Company’s interest rates, which given recent market volatility suggests that at best Black Sheep, beset by sharply rising interest rates, falling equity markets, tightening liquidity and a consumer crisis, will be a zombie company working solely for its bankers rather than shareholders for many years to come.

The fault for all of this lies fairly and squarely on Andy, Rob, and Jo’s shoulders. They should be deeply ashamed of themselves.

I will be happy to answer questions or speak to individual shareholders about my expressed views.

David Nabarro
Continuingly deeply concerned Black Sheep shareholder

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